Goldman Sachs warns: Bank of England has started a sustained period of loose monetary policy, with interest rates expected to be cut by 25 basis points in September, December, and March.

The Bank of England made the decision to cut interest rates on December 18, further reinforcing market expectations that the Bank of England is entering a more prolonged period of loose monetary policy. Against the backdrop of continued weakening economic momentum, Goldman Sachs still predicts that the Bank of England will cut interest rates multiple times in 2026. Goldman Sachs forecasts that the Bank of England will lower rates by 25 basis points each in March, June, and September. Previously, Goldman Sachs had roughly outlined rate cuts in February, April, and July. The adjustment in timing indicates that as inflationary pressures gradually ease and evidence of worsening labor market conditions mounts, Goldman Sachs believes the Bank of England's Monetary Policy Committee (MPC) will cautiously and steadily proceed with the easing process. Goldman Sachs analysis points out that recent data releases in the UK increasingly highlight risks to economic growth leaning towards a "slowdown" direction. In terms of the labor market, there are signs of cooling: business hiring has slowed down, workers face increased risk of unemployment, and wage growth pressure has eased to some extent. At the same time, Goldman Sachs expects inflation in the UK to remain at moderate levels in 2026, reducing the necessity for the Bank of England to maintain a tight policy stance. Although the current market pricing of the rate path shows a gradual trend, Goldman Sachs believes that if subsequent data continues to confirm the above trends, the Bank of England's rate cuts may exceed investors' expectations. The bank said that weak economic activity data would give policymakers more confidence and lean towards a dovish stance, especially when inflation expectations remain anchored. The rate cut implemented in December signifies a shift in the Bank of England's policy narrative, indicating a move from addressing ongoing inflation issues to supporting economic growth. However, policymakers are expected to continue to be data-dependent, closely monitoring wage movements, inflation trends in the service sector, and the broader financial environment. From a market perspective, the evolving dynamics of the Bank of England's policy outlook will affect UK interest rate trends, pound exchange rate performance, and relative monetary policy differentials. If the easing cycle progresses at a faster pace or to a greater extent, the pound exchange rate may face downward pressure, but at the same time, it could provide strong support for UK risk assets, especially against the backdrop of increasingly cautious actions by major central banks worldwide. Overall, Goldman Sachs's latest forecast underscores the market's growing belief that the Bank of England's tightening phase has come to an end, and the challenge now lies in how to calibrate the pace and extent of rate cuts to accommodate the reality of the UK's weakening economy.